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Foreign Account Tax Compliance Act and Common Reporting Standard
January 2019
www.moorestephensdm.com PREC ISE . PROVEN. PERFORMANCE .
Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)
various countries. The CRS sets out the
financial account information to be
exchanged, the financial institutions
required to report, the different types of
accounts and taxpayers covered, as well as
common due diligence procedures to be
followed by the financial institutions. The
Standard consists of the following four key
parts:
1. A model Competent Authority
Agreement (CAA) (providing the
international legal framework for the
automatic exchange of CRS information)
2. The Common Reporting Standard
3. The Commentaries on the CAA and the
CRS
4. The CRS XML Schema User Guide
There are similarities between FATCA and
CRS. They both require:
• Implementation of due diligence
procedures
• Documentation of account holders
• Reporting
There are also certain differences.
Classifications under CRS are different.
Certain entities not classified as FFIs under
FATCA will be classified as Financial
Institutions (FIs) under CRS. Also, many of
the exceptions and de minimis exclusions
allowed under FATCA are not available
under CRS. See chart on next page.
Although many countries complained about
the administrative requirements and
invasion of privacy, they liked the idea of
obtaining information about tax cheats and
decided that maybe it wasn’t such a bad
idea. Hence, the Organization for Economic
Co-operation and Development (OECD)
instituted the Common Reporting Standard
(CRS). These rules became effective for
2016 information for certain early adopters
(e.g., the UK). All organizations subject to
FATCA will also have to comply with CRS.
Introduction to FATCA/CRS
The US legislation introduced a general
requirement on US withholding agents to
withhold tax on certain payments to Foreign
Financial Institutions (FFIs) that do not agree
to report certain information to the IRS
regarding US accounts, and on certain
payments to non-financial foreign entities
(NFFEs) that do not provide information on
their substantial US owners. Withholdable
payments include US source income on
securities and any gross proceeds from the
sale of securities that generate US source
income.
The CRS rules involve legislation that is
needed in each of over 100 participating
jurisdictions, based upon the guidelines
issued by the OECD. These have been
implemented during 2017 and 2018 in the
The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 to help prevent tax evasion by US citizens and taxpayers with offshore financial accounts. This was both an attempt to ferret out individuals with accounts set up in prior years and identify assets currently earning income outside the US. This came together with other Internal Revenue Service (IRS) initiatives targeting offshore banks and US taxpayers who were trying to hide assets.
2 Foreign Account Tax Compliance Act and Common Reporting Standard
3Foreign Account Tax Compliance Act and Common Reporting Standard
FATCA vs CRS comparison chart
CRS FATCA NOTES
Governing Authority
Over 100 Separate Jurisdictions US: IRS Will need to monitor each jurisdiction.
Account Scope 1. Individual and Entity accounts held by tax residents of any CRS jurisdiction.
2. Passive NFEs with Controlling persons resident in any CRS jurisdiction.
1. US Individuals.
2. US Entities.
3. Passive NFFEs held by Substantial US Owners.
CRS will probably involve more reportable accounts than under FATCA.
Thresholds No thresholds (except for pre-existing accounts).
$50,000 for individuals;
$250,000 for pre-existing accounts.
May want to consider having no thresholds for either type of reporting to avoid culling process.
Documentation Requirements
New Self-Certification Forms will be needed. (Must address multiple tax residences, CRS legal entity classification.)
Form W-9/ W-8 Series may be used.
CRS can not use the US tax forms. Under CRS, all entities will ultimately have a Controlling Person(s).
Registration None. IRS Portal: GIIN, Agreement (non-IGA and Model 2 IGA countries) and Certifications.
For CRS, no special registration but reporting under local rules to local authorities.
Withholding No Withholding Required under CRS.
30% withholding on Non-compliant Payees and Intermediaries.
Audits and potential penalties by CRS jurisdictions to be enacted.
Entities
FATCA: FFIs must report on US account
holders’ financial accounts and income to
the IRS. In some situations they must also
withhold taxes (30%) on certain types of
payments. They are being forced to do this
because of the potential 30% withholding
that will result on any US source payment
they receive if they are not FATCA
compliant. Even if they have neither US
account holders nor investments in the US
that produce US source payments, they will
be forced to comply because they will be
dealing with other FFIs that are compliant
and will require them to be compliant or
else they will withhold on payments and/or
report their non-compliance to the IRS.
CRS: FIs must report on any CRS account
holders’ information to their local
jurisdiction, which will then provide this to
all the other (over 100) jurisdictions that
have account holders with the FI. Some
places, like the UK, have portals where both
FATCA and CRS data is reported to the local
authorities.
Foreign Financial Institutions (FFI/FI)An FFI/FI is defined as any foreign entity
which:
1. Accepts deposits in the ordinary course
of a banking or similar business
(depository institution);
2. As a substantial portion of its business,
holds financial assets for the benefit of
one or more persons (custodial
institution); or
3. Is an investment entity.
Who is Targeted?FATCA and CRS is applicable to individual
taxpayers holding offshore investments that
exceed reporting thresholds and also has far
reaching consequences for financial
institutions including banks, insurance
companies, pension funds, mutual funds,
investment managers, private equity funds
and broker dealers, collectively identified as
foreign financial institutions (FFIs) under
FATCA and financial institutions (FIs) under
CRS. It also effectively sweeps into its net
such entities as foreign trusts and family
offices that are resident outside the country
of the beneficiaries or families.
Individuals
FATCA: US individual taxpayers must report
their foreign financial bank accounts and
assets on forms filed with the IRS and US
Treasury Department. This includes the
FBAR bank account form that has been
required for several years, and now Form
8938 that was required starting in 2011.
CRS: This varies by country since it is a
jurisdiction by jurisdiction decision on what
must be reported by individuals. While there
may not be any new form of reporting, the
decision will be what to do about accounts
that have not been reported in the past.
This last category is the most wide-ranging
in that it may encompass trusts, family
offices and investment advisors because it
involves any entity primarily engaged in the
conduct of a business for customers dealing
with financial assets or an entity whose
gross income is primarily attributable to
investment or trading in financial assets and
the entity is managed by another entity that
is an FFI. There has only been a limited carve
out exception for small trusts where there is
no professional management involved.
Withholding will not be required under
FATCA if an FFI enters into an agreement
with the IRS. CRS does not have any
withholding requirement, only reporting.
Participating FFIs will be required to identify
their US accounts and comply with
verification and due diligence procedures
prescribed by FATCA regulations. US
accounts are defined as any financial
accounts held by a US individual taxpayer or
certain US owned foreign entities. CRS FIs
must follow the KYC/AML requirement,
which are basically the same. There is no de
minimis account under CRS, unlike FATCA.
FFI/FIs are required to report certain
information on an annual basis with respect
to each account held by an individual
resident in the US or a CRS jurisdiction.
They must also comply with the request for
additional information from the US or CRS
authorities where an account holder refuses
to provide ownership information. The
information that must be reported includes:
4 Foreign Account Tax Compliance Act and Common Reporting Standard
As of January 1, 2019, there is no longer
any “Timeline to Implementation”.
Generally, as of that date, both the
FATCA and CRS requirements are fully
in force.
5Foreign Account Tax Compliance Act and Common Reporting Standard
• Name, address, and taxpayer
identification number (TIN) of each
account holder who is an individual
• Account number
• Account balance or value
• Gross receipts and gross withdrawals or
payments from the account during each
calendar year
Under FATCA, if foreign law prevents the FFI
from reporting the required information
absent a waiver from the account holder,
and the account holder fails to provide a
waiver within a reasonable period of time,
the FFI is required to close the account.
FATCA effectively enlists FFIs and many
foreign governments in the US
government’s attempt to combat tax
evasion by US taxpayers, whether resident
in the US or not. FFIs in IGA countries do
not have to close the accounts, but must
report certain information on the
nonparticipating account holders. There are
no similar requirements under CRS (unless
required under the local jurisdiction
implementing the legislation).
Non-Financial Foreign Entities (NFFE/NFE)Any foreign entity that is not an FFI/FI is
considered to be an NFFE/NFE. Under CRS,
certain entities can avoid the FI classification
if they meet the specific criteria of an
Active NFE.
FATCA requires a withholding agent to
withhold 30% of any withholdable
payment to an NFFE unless:
1. The beneficial owner of the account
provides proper certification (Form
W-8BEN or W-8BEN-E) that there are no
substantial US owners of the entity or the
tax information on the US owner;
2. The withholding agent does not know or
have any reason to know that the
information provided is incorrect; and,
3. The withholding agent reports the
information to the IRS.
As mentioned above, there is no
withholding requirement for IGA FFI and FIs
under CRS.
Family Offices and TrustsMany family offices and foreign trusts will
be considered FFIs because they fall under
the Investment Entity (described in Reg.
Sec. 1.1471-5(e)(4)). This is because most of
this type of entity’s gross income is from
investments, which makes it fall into the
category of an FFI. There are certain
exceptions to the FFI classification for trusts
that are not professionally managed (or
claim they are not in a business with
customers). Even if the FFI classification can
be avoided, most trusts will probably be a
passive NFFE. This avoids registration with
the IRS, but the NFFE will need to disclose
any substantial US owners and controlling
US persons (beneficiaries) of the NFFE when
completing a Form W-8BEN-E.
Under CRS, Passive NFEs will have to
disclose any “Controlling Persons”.
Interestingly, FIs in non-participating
jurisdictions – such as the US – are classified
as Passive NFEs and must report Controlling
Persons.
Non-Financial US Multinational CompaniesFATCA even impacts US multinational
companies with foreign subsidiaries. A
determination for each foreign entity will be
required because they, too, will need to
document their FATCA status. The focus of
FATCA is not on withholding; this is only the
penalty provision to force reporting. But
foreign nonfinancial businesses will need to
focus on payee documentation and
payment reporting to avoid the withholding
penalty regime. This also highlights the
withholding requirements US multinationals
have always had related to payments to
foreign payees where withholding under
Chapter 3 and reduced treaty withholding
rates have always been an issue.
While there are exemptions from being
classified as an FFI related to holding
companies and treasury centers for
nonfinancial companies, they will need to
review (and document) this exemption in
case it is ever challenged by the IRS or an
unrelated US withholding agent (e.g. US
banks). There are also issues related to
foreign joint ventures where they do not
control the foreign legal entity.
The Model 2 IGA directs the FFI to register
with the IRS and report specified
information about US accounts directly to
the IRS in a manner consistent with the
general regulations, with certain
modifications. If there is a problem
disclosing this information under domestic
law, the FFIs are required to obtain consent
from the US account holders to disclose this
information. There were 113 countries
listed on the IRS website as having IGAs
with the US as of October 2018. See https://
www.treasury.gov/resource-center/
tax-policy/treaties/Pages/FATCA.aspx.
There are a similar number of jurisdictions
that have signed on for CRS. See http://
www.oecd.org/tax/automatic-exchange/
crs-implementation-and-assistance/
crs-by-jurisdiction/#d.en.345489
Registration and ImplementationFATCA requires that FFIs register with the
IRS. They are able to do so through a secure
online web portal at www.irs.gov/fatca.
Upon approval, they will receive a GIIN from
the IRS. FFIs that are under a Model 1 IGA
will also have to sign an agreement to
follow the requirements of the FFI
Agreement. All of this should have been
completed by now for FFIs already in
existence.
The Direct Reporting NFFE is different from
other NFFEs. It must register with the IRS
and obtain a Global Intermediary
Identification Number (GIIN – discussed
below). The benefit of this may be that it
avoids additional documentation requests
from US withholding agents about an
entity’s FATCA status due to the agent
having a GIIN number, which provides
additional assurance that it is not required
to withhold under the FATCA rules.
Inter-Governmental AgreementsIn many cases, foreign law would prevent
an FFI from reporting directly to the IRS the
information required by FATCA. To
overcome these legal impediments (and
probably to relieve the IRS of some of the
administrative burden of enforcing FATCA),
the US Treasury Department has
collaborated with foreign governments to
develop two alternative Model
Intergovernmental Agreements (IGA) that
facilitate the effective and efficient
implementation of FATCA in a manner that
removes domestic legal impediments to
compliance.
The Model 1 IGA requires FFIs to report to
the authorities in their jurisdiction, rather
than directly to the IRS. The partner
jurisdiction then exchanges this information
with the IRS on an automatic basis.
To register as an FFI, an entity must register
on the IRS web portal and declare its
Responsible Officer (RO). The RO will be the
person who must certify compliance with
the FFI requirements on an ongoing basis.
An RO must be an officer of the FFI. An
entity can also designate a Person of
Contact (POC), which can be useful in
assisting the RO in complying. The POC
does not have to be an officer or employee
of the FFI. In practice, we have seen the
POC be a third party service provider.
While under the CRS rules, if there is no RO,
there generally is a requirement that the FI
have a contact person whom the local
authorities can contact for questions.
General Rules of Withholding
An FFI will be subject to FATCA withholding
of 30% on any US source withholdable
payment made unless the withholding
agent has established that the payment is
exempt (e.g., the FFI is properly registered
with the IRS or is an exempt organization).
A withholding agent may treat a payee as a
deemed compliant FFI if the withholding
agent has a withholding certification that
identifies the payee as a certified deemed
compliant FFI. FFIs in IGA countries do not
have to withhold.
6 Foreign Account Tax Compliance Act and Common Reporting Standard
7Foreign Account Tax Compliance Act and Common Reporting Standard
There are no withholding requirements
under CRS. However, every FFI must
remember that there can be withholding
required under provisions other than FATCA
or CRS on cross border payments. There can
be both local withholding rates and lowered
treaty rates that FFI/FIs need to consider.
Due Diligence Requirements for Entity
Accounts
An FFI/FI must determine who the account
holder is or if an account is held by a
recalcitrant account holder or a non-
participating FFI by applying the required
procedures to establish the status of each
payee. This is required regardless of whether
the participating FFI/FI makes a payment to
the account.
For foreign trusts or family offices that are
determined to be FFI/FI (as Investment
Entities) this can be an interesting exercise
when trust terms allow for discretion as to
whom may be a beneficiary. This will require
a careful reading of trust terms and
documents, as well as a review of prior year
distributions.
Account Reporting
Generally, participating FFI/FIs are required
to report the following:
• Name, address and TIN of each account
holder
• Account number
• Account balance or value of the account
• Payments during the calendar year
Annual reports are to be completed and
either sent to the IRS (for FATCA reporting
by FFIs in non-IGA countries and Model 2
IGAs) or to the local country tax authorities
(for FATCA reporting by Model 1 FFIs and FI
reporting CRS information). There are
normally reporting portals for FATCA and
CRS account reporting. This information will
then be shared with the appropriate
jurisdiction in the following year.
Compliance Program
The FATCA RO must establish a compliance
program that includes policies, procedures
and processes sufficient for the FFI to satisfy
the requirements of the FFI Agreement. The
first certification period begins on the
effective date of the FFI Agreement and
ends at the close of the third full calendar
year following that date.
Each subsequent certification period covers
three calendar years. This means many FFIs
were required to certify compliance for the
period ending December 31, 2017 and
should have reported this through the IRS
web portal during 2018. Also, for Model 2
FFIs and non-IGA FFIs that have an
agreement with the IRS, these must be
renewed periodically through the portal.
As with other reporting requirements, the
compliance program for Model 1 FFIs is not
dictated by the FFI Agreement and will be
determined based upon local rules in the
country of the FFI.
For CRS FIs, there is no specific or uniform
certification requirement and the
procedures on certification or renewal are
left up to each jurisdiction.
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